The short answer
Then the recapture is limited to the gain. Both the 25% layer and any ordinary recapture are measured as the smaller of the depreciation taken or the gain, so depreciation beyond the gain is never taxed again. The trade-off is that every dollar of the gain is unrecaptured section 1250 gain, taxed at your ordinary rate up to a 25% cap, and none reaches the 15% or 20% rates. If the sale price falls below your adjusted basis, there is no recapture at all and the loss is generally ordinary.
At a glance
| Recapture cap | The smaller of depreciation taken or the total gain |
|---|---|
| Rate on the whole gain | Ordinary rates up to a 25% maximum, never 15% or 20% |
| Excess depreciation | Not taxed again; it matched a real loss of value |
| Same-year 1231 losses | Limit the 25% layer to your net section 1231 gain |
| Prior 1231 losses | Five-year lookback turns that much gain into ordinary income |
| Sale below basis | A section 1231 loss, ordinary if 1231 losses exceed gains |
| NIIT | Still applies to the gain above the MAGI thresholds |
The recapture rules stop at your gain, whichever depreciation figure is larger
Section 1250(a) treats as ordinary income a percentage of "the lower of" the additional depreciation or the excess of the amount realized over adjusted basis. Section 1245(a) does the same for personal property components, using the lower of recomputed basis or the amount realized.
The 25% layer follows the same ceiling. Section 1(h)(6) defines unrecaptured section 1250 gain as the long-term gain that would be ordinary income if all depreciation were recaptured, and line 1 of the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D enters the smaller of the depreciation on Form 4797 line 22 or the total gain on line 24.
So recapture is never a tax on depreciation as such. It is a label that tells you how much of your gain is taxed at the depreciation rates, and it cannot exceed the gain.
The cost of a small gain is that all of it lands in the 25% layer
Gain is filled from the depreciation layer first, so when depreciation exceeds gain, nothing is left over for the 0%, 15% or 20% rates. A $120,000 gain on a property with $200,000 of depreciation is $120,000 of unrecaptured section 1250 gain.
Topic 409 describes 25% as the maximum rate on that layer. The Schedule D Tax Worksheet charges your ordinary rate when it is lower, so a household whose other income stops in the 22% or 24% bracket pays those rates on the part of the layer that fits there.
Components moved to shorter lives by a cost segregation study are different. Their recapture is ordinary income at full bracket rates, also limited to the gain, and it is covered in how much depreciation recapture you will owe.
Other section 1231 results in the same year or the prior five can shrink or reclassify the layer
A rental held more than a year is section 1231 property. Under section 1(h)(6)(B), the unrecaptured section 1250 gain from such sales cannot exceed your net section 1231 gain for the year, so a loss on another rental or business asset sold the same year reduces the 25% layer.
Section 1231(c) looks back five years. Net section 1231 losses you deducted as ordinary losses in that window and have not yet recaptured turn an equal amount of this year's net 1231 gain into ordinary income. The worksheet subtracts that amount, which the Instructions for Form 4797 report on line 8, before figuring the 25% layer.
Ask your CPA for the last five years of Form 4797 before estimating the tax on a small gain. A prior loss can change the answer more than the rate tables do.
Worked example: $200,000 of depreciation and a $120,000 gain
Hypothetical, round numbers; run your own numbers with your CPA. You bought a rental for $500,000, of which $400,000 was the building, and claimed $200,000 of straight-line depreciation. Your adjusted basis is $300,000, and you sell for $420,000 net of costs.
The gain is $120,000. Recapture is the smaller of $200,000 or $120,000, so the entire $120,000 is unrecaptured section 1250 gain. At the 25% cap that is at most $30,000 of federal tax, less if part of it fits inside your 22% or 24% bracket, plus the 3.8% net investment income tax if your MAGI is over $250,000 joint or $200,000 single.
The other $80,000 of depreciation reduced your taxable rental income in earlier years and is never taxed again, because the building really did lose that value. Had you sold for $280,000 instead, you would have a $20,000 section 1231 loss and no recapture.
Whether to exchange a small gain depends on the replacement, not the tax alone
A completed exchange defers the full $120,000, and the deferred depreciation layer travels into the replacement's basis. The question is whether $30,000 or so of tax is worth the cost and constraints of an exchange, which is weighed in is a small gain worth a 1031.
If the sale is at a loss, do not exchange. Section 1031 would defer the loss as well, and selling at a loss usually means taking it. Also check whether depreciation you never claimed is still reducing your basis, covered in recapture when depreciation was never claimed.
If you do want to stay invested, a Delaware Statutory Trust interest can be sized to your proceeds, subject to each offering's minimum.
Related questions
Do I lose the benefit of the extra depreciation?
No. It reduced your ordinary taxable income in the years you claimed it, and the recapture rules can only take back as much as your gain. The extra amount simply matches a real decline in value.
Is the 25% applied even if my bracket is 12%?
No. 25% is a ceiling. The Schedule D Tax Worksheet taxes the layer at your ordinary rates while it fits in brackets below 25%, so a low-income year can mean 10% or 12% on part of it.
Does the 3.8% surtax also stop at the gain?
The net investment income tax applies to the gain you recognize, so yes. It is figured on the lesser of net investment income or MAGI over the threshold, as explained in the NIIT and the rental sale.
What if I took bonus depreciation on improvements?
Bonus depreciation on section 1245 components is recaptured as ordinary income up to the gain allocated to those components. Allocate the sale price between land, building and components before you estimate the tax.
Does an installment sale change the order?
Under the Schedule D instructions, gain in each installment payment is treated as unrecaptured section 1250 gain until that total is used up, so the 25% layer is reported first.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 1250, gain from dispositions of certain depreciable realty (Cornell LII)
- 26 U.S.C. section 1245, gain from dispositions of certain depreciable property (Cornell LII)
- 26 U.S.C. section 1(h)(6), unrecaptured section 1250 gain (Cornell LII)
- 26 U.S.C. section 1231, property used in the trade or business (Cornell LII)
- IRS, Instructions for Schedule D (Form 1040), Unrecaptured Section 1250 Gain Worksheet
- IRS, Instructions for Form 4797
- IRS, Topic no. 409, Capital gains and losses